State tax hike to make impact on paychecks

More than 360,000 notices have gone out to Illinois employers on new withholding tables resulting from an increase in individual income-tax rates.

Tim Landis

More than 360,000 notices have gone out to Illinois employers on new withholding tables resulting from an increase in individual income-tax rates.

Depending on the timing of paychecks, some workers may already have noticed the change, and all should see the new rates within the next month, said Sue Hofer, spokeswoman for the Illinois Department of Revenue.

“If you get paid weekly, you probably saw it in last week’s check. If you get paid monthly, you should see it in February,” said Hofer.

The increase in the individual rate from 3 to 5 percent took effect the day Gov. Pat Quinn signed the bill on Jan. 13. Technically, the increase is retroactive to Jan. 1, but Hofer said employers are not required to withhold lump sums to cover taxes for the first two weeks of the year.

Instead, that amount will be reflected when 2011 returns are filed in 2012. Whether or not take-home wages go down, depends on income and deductions, Hofer said. The higher state rates also took effect at about the same time federal Social Security rates were cut.

The transition has not been without glitches, especially for small businesses, said Patricia Powers of the Springfield accounting firm of Gubin & Powers Inc.

“We’ve had calls from smaller clients who do their own payroll,” said Powers. “Everybody was a little blindsided by how fast this happened.”

It has simply been a matter of updating software in most cases, but Powers said some of the smallest businesses still rely on traditional bookkeeping.

Co-owner Scott Gubin said state withholding is only one of many changes that have occurred in a matter of months, including extension of Bush-era tax rates and the reduction in Social Security taxes.

“The software developers updated very quickly,” said Gubin. “The state, on the other hand, took its time. It just wasn’t geared to that, it happened so quickly.”

A coordinator for the local AARP tax-preparation program said rapid changes in federal and state rules have made it harder to recruit volunteers this year. The program provides free assistance to senior citizens.

“A lot of people say they don’t want to volunteer, it’s just such a hassle,” said Bobbie Johnson. She added that taxpayers unhappy with higher taxes sometimes take their frustration out on volunteers.

“The found out they weren’t going to get as big a refund,” said Johnson. “Who do they chew out? They chew out the volunteer.”

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Questions and answers regarding Illinois' income tax increase

Q. When did the tax hike take effect?

A. It became effective when Gov. Pat Quinn signed it Jan. 13. The increase is retroactive to Jan. 1.

Q. How much more can I expect to pay?

A. The individual tax rate in Illinois increased from the current 3 percent to 5 percent. A person who previously paid $1,000 in state income taxes pays $1,660 under the new rate. A person’s actual tax liability depends on multiple factors, including income and deductions.

Q. When will I see the effect of the tax hike on my paycheck?

A. You should have already. It depends on how quickly individual employers implement new withholding schedules. The Department of Revenue issued those new schedules to 300,000 employers and posted the information on its website.

Q. The tax hike is retroactive to Jan. 1. Does that mean my employer is taking a bigger chunk out of my check to cover what wasn’t withheld the first couple of weeks of the year?

A. No, says Department of Revenue spokeswoman Sue Hofer.

“We don’t expect employers to withhold extra money to cover the first one or two paychecks already received by their employees,” she said.

Q. Does that mean I get a break on the first couple of weeks of the tax hike?

A. No again — the state will get its cut eventually. When you file your 2011 tax returns a year from now, the tax schedules will reflect the increase. If you normally have to pay an additional amount to the state as part of the return, you may have to pay a little more. If you normally get a refund, it may be a little less to compensate for the tax hike. Either way, state officials said the impact shouldn’t be significant because the changes are taking place early in the year.

Q. How do corporations handle their tax increase?

A. Corporations are required to make estimated tax payments to the state four times per year. They’re being advised on how to adjust those payments.

Q. Are the increases permanent?

A. The bill approved by lawmakers stipulates the increase is temporary while the state fights its way out of its budget problems. After four years, the individual rate is scheduled to drop to 3.75 percent. Beginning in 2025, the individual rate is scheduled to drop to 3.25 percent.

Illinois has had two previous temporary income tax increases. One was allowed to expire, while the other was made permanent.

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